Answer:
$964.42 approx.
Explanation:
Current value of a bond is the present value of it's future stream of coupon payments as well as it's redemption value upon maturity.
Here, coupon rate = 2.850/2 = 1.425% per period
N = no of periods = 10 years × 2 = 20 periods
Face Value = $1000 assumed
Yield to maturity (YTM) = 3.27/2 = 1.635%
Present Value or [tex]B_{0}[/tex] shall be calculated as:
[tex]B_{0} = \frac{C}{(1\ +\ YTM)^{1} } \ +\ \frac{C}{(1\ +\ YTM)^{2} } \ +........+\ \frac{C}{(1\ +\ YTM)^{20} } \ + \frac{RV}{(1\ +\ YTM)^{20} }[/tex]
[tex]B_{0} = \frac{14.25}{(1\ +\ .01635)^{1} } \ +\ \frac{14.25}{(1\ +\ .01635)^{2} } \ +........+\ \frac{14.25}{(1\ +\ .01635)^{20} } \ + \frac{1000}{(1\ +\ .01635)^{20} }[/tex]
[tex]B_{0}[/tex] = 16.94 × 14.25 + 722.99 = 241.4280 +722.99
[tex]B_{0}[/tex] = $ 964.418
Thus, current price of the bond is $964.42 approx.
